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Estate Planning 7
Sustainable Civilization: From the Grass Roots Up Estate and Financial Planning - Providing Assets for the Future - 2 - 3 - 4 - 5 - 6 - 7 - 8 FINANCIAL PLANNING LONG TERM CARE INSURANCE Health problems can greatly change your life, and if you're not prepared to deal with the costs they can devastate the rest of your financial and retirement planning. Because you cannot predict the future, it is a good idea to think about long-term care as part of your estate plan. What is long-term care? It is assistance to help you if you have a disabling or chronic illness and cannot care for yourself. It is not necessarily traditional medical care in that it may not be intended to improve or correct a medical problem, but rather to help you cope with your condition. Consider, people are living longer, medicine allows us to continue on with conditions which only a few decades ago would have clearly meant death. Some examples of long-term care are: Home Health Care: Trained personnel come to your home on an ongoing basis to help with activities of daily living, such as bathing, dressing, or eating. They may also help prepare meals, run errands, and do light housekeeping. Respite Care: This provides a break for family members when they are the primary caregivers for the disabled person at home. A respite caregiver usually comes to the home and may be a volunteer. Adult Day Care: Typically at a center that provides both health care and social services for people who cannot be left alone during the day. Assisted Living Care: This is a combination of housing, personalized support services, and health care designed to meet the individual needs of people who require some help with daily activities but not the skilled care of a nursing home. This care is ideal for someone who is too frail to live alone but does not need to be in a nursing home. Assisted living facilities may be independent facilities, combined with skilled nursing facilities, or part of a continuing care retirement community. Most costs are paid by the resident and family members. Nursing Home Care: This is for people with chronic or disabling illnesses who cannot care for themselves but who do not need hospital care. Nursing homes offer up to three levels of care—skilled nursing care, personal care, and professional care. The key question for your financial plan is, How do I pay for long-term care? Costs for long-term care vary depending on the amount of care provided, type of care provided, and location where the care is provided. You may use one or more of these ways to pay for long-term care. Personal Funds: Your own personal resources, such as personal current income, savings, or investments. However as medical procedures have become more complex and expensive, and expansive, the "middle class" is caught in a bind. After paying tax throughout their life to support the Medicaid program, which was originally intended for the poorest segment of the population, in their old age the "middle class" find if they've saved and invested, they're not eligible for assistance until their lifetime assets are expended. Contributions from Family Members: If you do not plan ahead for long-term care, do not have sufficient personal resources, and do not qualify for such government assistance as may be available, you may have to rely on your family members to pay for or to deliver care. This can be burdensome on your family if family members do not have the financial resources to pay for care or the necessary skills or time to provide the proper care. In addition, family members, who in the past would have been relied on for assistance, often live great distances apart. Medicare: Medicare covers very little of the long-term costs that most people need. Medicare will pay for up to 100 days of care in a skilled nursing facility after you have been hospitalized for at least three days. Medicare covers the first twenty days entirely. The patient pays a daily coinsurance after the twentieth day until day 100. After day 100, Medicare covers none of the costs. Medicare does not pay for custodial care. Medicaid: Medicaid is a joint federal and state program intended to pay for health care for people with limited income and resources. It does pay for custodial nursing home care. Each state sets its own standards for Medicaid eligibility, determines the type of services provided, and administers the program under federal guidelines. These rules are complex, vary from state to state, and are of course subject to change by the legislatures. If you expect to have significant assests and retirement income, yet want to qualify for Medicaid, there are legal steps you can take, such as transferring assets to carefully and specifically worded trusts. Some brief information for coverage in Arizona is: Income not over $1656/month. Resources (cash, bank accounts, stocks, bonds, etc.) not more than $2,000 value for an individual. For a married couple, the non-applicant spouse may keep up to 1/2 of such resources, or a total value of $90,660, whichever is less. If you believe you may need long term care, and your plan is to rely on Medicaid, you must realize you will probably need to make specific and significant changes in your assets and financial plans, lest you essentially lose on a lifetime of earnings. The asset rules have lead many senior citizen couples to the decision that a divorce is necessary for them to protect their life savings. Veterans Administration (VA) Health Benefits: Many larger VA hospitals offer extensive long-term care services. You should contact the nearest VA hospital to determine your eligibility for the services the hospital offers. Long-term Care Insurance: This is private insurance for which you pay designed to cover long-term costs. Depending on the policy, long-term care insurance may cover nursing home stays, home health care, adult day care, assisted-living facility care, and respite care. In general, the younger you are when you initiate such a policy, the lower the payments. Do I need long-term care insurance? Maybe, depending on your health, age, and financial situation, among other factors. It is a personal decision similar to whether you need life insurance. If you think you may need long-term care and believe you have adequate other funding sources then you may not need long-term care insurance. What should I look for in a long-term care insurance policy? There are several issues to consider when evaluating a long-term care insurance policy: Services Covered: Many policies cover only long-term nursing home care. You should make sure your policy also covers other types of care desired (e.g., home care, adult day care). Amount of Benefit: A typical policy allows a fixed dollar amount for each type of service, regardless of the actual cost of the service. Paying a higher premium may buy a policy that will pay more for the service. Find out if the policy pays a different amount depending on the type of care provided. For example, is the payment for a day of nursing home care different from the payment for a day of home care? You may have more flexibility in planning later on if the policy makes the same payment for the different services. Deductibles, Co-payments, and Waiting Periods: Generally the higher the deductible, the lower the premium. Also, most policies have a waiting period of 30 to 90 days during which time you have to pay for services from your own funds. Also, many policies only pay benefits for a fixed period of time rather than indefinitely. After the time period runs, you will have to rely on your own funds or other sources to pay for the services. Payment of Benefits: Find out the requirements to start coverage under the policy. Some insurance companies accept a covered person's doctor's statements while others require certification from the company's medical staff. Find out if there are restrictions on illnesses covered or transfers to a nursing home not following a hospital stay. Forfeiture Provisions: Find out if the policy has any forfeiture provisions, which may permit you to recover some of the accrued value of the policy if you can no longer afford to pay the premiums. This could mean you might be able to keep the policy with reduced benefits, convert it into term life insurance, or borrow against or receive the cash value of the policy if it has any cash value. Inflation Protection: Expect the cost of long-term care to rise over time, and see which policy offers inflation protection. How can I compare long-term care insurance policies? Read the fine print, and prepare a side by side checklist to compare the policies. It is, in the end, a personal decision and a personal purchase. Is there a federal employee long-term care insurance program? Yes, beginning in 2002, military members and civil service employees became eligible for the Federal Long-Term Care Insurance Program administered by the Office of Personnel Management. Information is online at http://www.opm.gov/insure/ltc/faq/eligibility.asp#100 When do I need to act? Well before your retirement, or the onset of an illness. If you already need to enter a nursing home, you're not likely to be able to purchase insurance. Also, if you already need to enter a nursing home, it's too late to make changes in your assets. If you try to give away your property, you'll find the government denying any medicaid payment for their "lookback" period. It works something like this. They estimate the value of your current property, and any property you gave away in the preceeding years (i.e. five years). This total value is divided by the monthly cost of nursing home care, and government assistance for care is then denied for the time that your assets COULD have paid for care. Economically, the projections for the cost of nursing home services, and the portions paid by the government, are not good. The post World War II "baby boomer" generation will in 2008 start to reach retirement age. At that point and for the following several years, this group which is among the highest earning, highest tax paying portion of the population, will cease paying taxes, and become eligible for government benefits such as Medicaid nursing home coverage. Statistics would indicate that the demand for nursing home services should jump, while tax revenues fall unless taxes are raised dramatically. What, if anything, this will prompt lawmakers to do will be up to the representatives in position at that time. FINANCIAL PLANNING SOCIAL SECURITY A significant portion of the anticipated old age income for soldiers (and FERS civil serve employees) is Social Security . You need to understand the aspects of this potential benefit. Social Security and Your Paycheck. The social security tax which shows on your earnings statement is 7.65% of your gross wages. This is however only half of the tax, the other half is required to be paid by your employer. Since the other half of this tax is based on your status as an employee, your earnings, and with your prospective social security benefit based on both portions of the tax, in economic terms it is part of your wages which you would otherwise be paid were it not for existence of the tax. Therefore in effect you pay the entire 15.3% tax. The income tax allows deductions for certain medical insurance expenses, 401K, TSP, IRA deposits, etc. No such deduction applies to your social security tax. Likewise, your social security tax is NOT deducted before the regular income tax is calculated. The Social Security tax rate for 2004 is 15.3 percent on all wages up to $87,900. In terms of days worked, the tax represents about 9 weeks out of each of your working years. You must have 10 years of taxed wages in order to qualify for an old age benefit. Background of the program. The initial social security tax back in 1935 was 2% of the first $2,000 of wages earned. In the past, as increases in social security distributions reduced the amount of money being transferred to the general treasury, Congress increased the tax rate, and the level of income subject to the tax. This allowed the increased payments, while keeping the subsidy of other government spending. But with the system as written, it also meant that those paying the increased social security tax were promised higher benefits when they retired. The latest information at the Social Security Administration website shows that in 2003 they collected $468.6 Billion SS taxes on payroll and benefits. The program paid out $406 Billion in benefits, and cost the taxpayers $600 Million in administrative costs. By law, the remaining $62 billion of Social Security taxes collected was transferred to the treasury in exchange for a special class of federal security. The Social Security Administration lists as an "asset" $1.3553 Trillion in such securities, which is the Social Security "trust fund". All money deposited in exchange for these securities is then spent on other government programs. Your Social Security Benefits: 62 is considered as the minimum age for "early retirement" and beginning to collect a payment from social security. Initially, 65 was considered the age for "full retirement", but there is now a sliding scale where your birthdate determines your full retirement age. If you opt for early retirement, your social security payment is PERMANENTLY reduced, based on a scale of how much before your personal "full retirement" you started your request for benefits. Your projected social security old age benefit payment is based on the total tax collected on your wages. If you have not recently received a benefit projection from social security, you can request one online at: http://www.ssa.gov/mystatement/ Note though, there no legal basis on which any of us have an "entitlement" to receive social security. The laws relating to the program clearly indicate it is a benefit which can be changed, or eliminated. A Supreme Court decision in 1960 upholds this position. Challenges for the Program: Beginning in 2008, the first of the "baby boom" generation will reach retirement age. This spike in age distribution in our population represents a sudden increase in births in the post World War II period. This group is a significant percentage of the population. The financial challenge facing the social security system is that this group of people, who are paying the highest social security taxes will cease paying, and suddenly be eligible for large payments. Reports at the social security website clearly show that when the baby-boomers retire, annual income from the present social security tax is well below the amount that is scheduled to be paid out. Simple math on data available from the social security website shows that the payments promised to the baby-boomers can't be paid without tapping the trust fund. Therein lays the concern for your retirement planning, as Social Security starts to make "withdrawals" from the trust. The economic reality of Social Security is there is no pool of money. Every penny of social security tax collected has either been paid out to a recipient already, or has been spent. Every new penny of social security that is paid out to a new recipient, or as cost of living payments to existing recipients, means that less of the "excess" is transferred to the general treasury for spending. That means that the government must cut other spending, increase the general income tax, or increase the deficit. Every penny that social security "withdraws" from the "trust fund" means that the government must cut other spending, increase the general income tax, or increase the deficit. What does it mean for your retirement? You must draw your own conclusions as to how the government, and you, will deal with the financial discrepancies of the social security program. It appears the major options for the government are: Make the promised payments by dramatic increases in some combination of the social security, general income, or other taxes, or nflating the currency. Come up with a program where payments are made from within the actual and reasonable taxes collected. This would be some combination of payments smaller than promised, or a means to determine retirees who will be denied the promised payment (i.e. by a "Means Test" such as with welfare, where if you have another source of income, or assets, the payment is denied.) Were the Social Security program a failing private sector pension or annuity plan, in Bankrupcty, the court would apportion the benefits from the program in the same percentage as those who contributed. That is, those who have paid the most into the program would receive the greatest payout. The "fail safe" approach is to plan for your retirement as though social security will not be available to you. What to do? There have been discussions in D.C. that a partial remedy to the Social Security situation could be to allow you to divert a portion of your tax to an account that could be invested in stocks and bonds, but no such legislation has been successful. You could consider though creating your own program. Maximize your other retirement investments. TSP, IRA's, money market, stocks, bonds, mutual funds, real estate, etc., all of which are explained in further detail in other financial planning articles. Examples of Personal Savings vs Social Security. Look at what happens if YOU could take the 15.35% of your gross wages and invest it: Example: A minimum wage worker ($5.25/hour), graduates high school at 18, never manages to work above minimum wage, works full time until age 62, then retires. In this demonstration, the worker is able to divert the 15.35% being paid to Social Security into a private sector investment at 5% . Social Security payment on the amount if taken as taxes would be around $484 per month starting at retirement. If you die, your spouse or minor child may be eligible for a one time death benefit payment of $255, and may be eligible for some portion of your monthly payment. If you have no such qualifying heir, all of your social security tax payments "disappear" as far as your estate is concerned. By making a private sector investment instead, at age 62 the worker has around $266,000. The monthly interest on this amount would be around $1108, that could be withdrawn indefinitely, and still leave the principal to heirs. If you withdraw from the private sector account only the $484 per month that Social Security would have paid, and lived to age 80, you would be able to leave to your heirs around $480,000. At the moment, there are no options available for you to divert any portion of social security. Active duty members still however have the option to divert, tax deferred, 9% of their base pay to a tax deferred account. The financial history of TSP type accounts shows that it is not unreasonable to project earnings on such an account in excess of 5%. For example, the TSP website http://www.tsp.gov/rates/monthly-history.html shows the "C" fund having a 10 year average of 10.99%. Example: In boot camp, the new (18 year old) E-1 sets up a TSP at the maximum 9% salary deduction. (This soldier SOMEHOW makes it thru a 20 year career, and never got promoted beyond E-1, and never got credit for any longevity increase.) At 10.99% compounded interest, when retiring at age 38 the "recruit" would have around $93,000 in the TSP account. Making no further contribution, at age 62 the TSP could have over $1,200,000 in it. Not a bad "nest egg" for a career E-1. The examples demonstrate the benefit of consistent savings and compound interest. A vital aspect is starting early, and letting the compounding work for you. For specific advice on selecting individual investments, you should review appropriate publications, private counsel, your accountant, or other trained and qualified financial planning professionals. FINANCIAL PLANNING SPECIFIC GOAL, A HOME For the average working American, the purchase of a home is the largest investment of their lifetime. Looking at home ownership as an investment, you want the best "deal" and features in your investment. Pursuit of an active duty career in the military does not preclude you from investing in a home. Quite the opposite, I would argue that a soldier's ability to visit, live, and work in a variety of areas, while maintaining a single career, provides you greater insight into where is a "good place to live". Why put money into a home? Purchase vs. Renting (or living in government quarters). The really short answer is, at the end of renting for 30 years, what do you own? Flippancy aside, let's examine an example: E-5, in Yuma, monthly BAH around $838. $105,000 home, purchased with VA "nothing down", 30 year mortgage, monthly payment of $605. Insurance and real estate taxes, averaged monthly, will probably bring your total monthly payment up to your BAH. Inflation protection. In economic terms, inflation is not the increase in the value of things, rather it is the DECREASE in the value of currency. Absent inflation, the dollar you found in the crack of the sofa would, today, purchase the same amount and type of goods that it would when it was lost. Such is not however the case. In general, any amount held as cash, without being on deposit or invested in some manner, will consistently be useable to purchase less and less. Historically the greatest significant cause of inflation is when the entity that issues the currency progressively puts more currency into circulation. The two primary methods are to PRINT more currency, without any asset or financial activity to back it, or for the government to progressively fall into debt, spending money it does not have. Absent factors which effect its true value (i.e; a growing, or declining, community), real estate prices tend to track the overall national inflation rate, providing some protection against value loss for your money. Improvements you make to the property may result in increases in value beyond your "out of pocket" costs. In recent years, the annual inflation rate has been 3% to 4%, meaning your $105,000 home increases in value each year by $3,000 to $4,000, while your payments reduce the principle you owe. Your property taxes, and the interest you pay to your finance company, are deductible from your income for income tax calculation purposes, which may lower the income tax you are required to pay. Rental Income. Owning real property which you rent out provides you the opportunity to earn a return on your investment which probably exceeds the interest rate of any deposit account, "profit" from inflationary as well as real increases in real estate value, while also providing some extra income tax deductions. Tax Benefits. Under present tax law, when you rent out real property, you can deduct your operating expenses, property taxes, finance charges, insurance, even pencils, paper, postage, etc. related to the property. A significant consideration is "depreciation" of the structure and other non-land aspects of the rented property. Depreciation involves an assumption that such items wear out, and allows you to subtract this wear allowance, even if the items have not actually worn out. If the expenses for your property total to more than your rental income, you get to subtract your "loss" from your other earnings, before you calculate how much income tax you owe. Over the years, it may be possible for you depreciate the value of the structure to "zero", even thought the true value of the property has increased significantly. If you then sold the property, the IRS would consider everything above your depreciated "basis" in the property as profit, which would be taxed… Unless you took some additional steps. If your intent in selling a rental property is to obtain another rental property, you can postpone taxes on the increased (real or inflationary) by a procedure referred to as a "1031" exchange. While the legal fees for this process may cost several thousands of dollars, they will often be far less than the taxes otherwise due. You may also avoid taxes on the profits if you convert your rental property to your personal residence. (There are restrictions if you just did a 1031 exchange) Once the property is your personal residence, and you have lived there for an accumulated period of two of the preceding five years, current tax law allows you to exclude from income taxes all profit on the sale, even what would otherwise be recovered depreciation. (This is a great deal to save taxes if you have the two years to live there.) The exclusion from income is $250,000 per person, $500,000 for a married filing jointly couple. The Military Family Tax Relief Act of 2004 (MFTRA) added new rules. A taxpayer or spouse of such, serving on qualified official extended duty as a member of the uniformed services my suspend the running of the five year period of ownership and use during active duty for up to 10 years. Lawsuit Protection - Homestead Exemption Arizona law provides that anyone who resides within the state, who is 18 years or older, married or single, may as an automatic action of law hold exempt from a judgment creditor, other than your voluntary mortgagee, a homestead of up to $150,000 value in equity. The homestead may be your interest in "…one compact body land upon which exists a dwelling… a condo… or a mobile home… " In less legalese, if you live in Arizona and own a home, if you are sued and lose, you get to keep the first $150,000 value of your home. If you have just $150,000 or less, in equity, you keep it all. You need to cross-check this though with the 2005 bankruptcy law changes. Planning and implementing an estate which is as "judgment proof" as is allowed, can be a significant factor in avoiding lawsuits. First, I like to think that if you're looking far enough ahead to protect your assets, that you are also looking ahead to avoid problems in the first place, and to obtain sufficient insurance. But also, if someone is considering a lawsuit against you, and a preliminary investigation finds you have no assets which can be taken, perhaps they won't bother even starting a nuisance lawsuit. (One of the initial guidelines for a personal damage lawsuit is to find someone with "deep pockets", in otherwise lots of money.) As written, the statute restricts a married couple who own real estate to a $150,000 exemption as a couple. Yet, if an unmarried pair of individuals was to co-own the same piece of property, and be living there in the same manner as a married couple, the statute would allow each of them to exempt $150,000, for a total of $300,000 of protected equity. Why NOT buy a home? When you live in a private sector rental, or government quarters, many times utilities service and maintenance are included in the rental payment. When you're the owner, the costs are your responsibility. You pay your own electricity, other heating if applicable, water, sewage, trash, etc. You also pay for your own repairs. If you buy in a "bad marketplace", for example in a town where a major employer goes out of business, the value of the home may fall. If you are transferred, you will need to rent the home, sell it, or make payments on a vacant house. Estate and Financial Planning - Providing Assets for the Future - 2 - 3 - 4 - 5 - 6 - 7 - 8